Too Far, Too Fast

So says Nouriel Roubini in an article in Gloomberg today. And even though everybody has already read, and just to display some confirmation bias (with my "top" call of last week), I think it's important enough to post here.

Roubini Says Stocks Have Risen ‘Too Much, Too Soon, Too Fast’

By Shamim Adam and Francine Lacqua

“Markets have gone up too much, too soon, too fast,” Roubini said in an interview in Istanbul yesterday. “I see the risk of a correction, especially when the markets now realize that the recovery is not rapid and V-shaped, but more like U- shaped. That might be in the fourth quarter or the first quarter of next year.”Oct. 4 (Bloomberg) -- New York University Professor Nouriel Roubini, who accurately predicted the financial crisis, said stock and commodity markets may drop in coming months as the gradual pace of the economic recovery disappoints investors....

Actually, I'm a bit surprised at his relative bullishness (or the reportage of the same) of late. This more moderate tone is a bit more of what I'd expect from him.

A CNN Bearfest

In the absence of anything worthwhile to say today, how about this bearfest from a couple of weeks ago.

Niall Ferguson, Nouriel Roubini and Mortimer Zuckerman revive the Apocalypse.

I'm Buying

OK now that I'm in full conspiracy theory mode, my prediction for today is that GS and MS will have a busy day in the SP pits.

A comment in response to Marketwatch's pre-non farm payrolls numbers:

MarketWatch - why do you pass on this gobbledegook? You guys know as well as all of us that the U.S. government "statistics" are about as dependable as a 2 dollar watch.

...and there are dozens along the same lines.

The payroll numbers will be dreadful, but folk will suspect the government is lying and things are actually much worse (Noooo - who'd believe that?). Folks will realise the bobbleheads optimism is totally misplaced and flog all their stocks the market will open sharply down.

GS & MS will start buying with their ears pinned back for some mysterious account, the market will finish green, Goldilocks will make another cameo appearance, folks will be conned into believing all is well and a return to the upward grind will ensue.

Disclaimer: I'm short gamma on the indices with a little upside skew.

OK I've let my cynicism out for a run, back to normal programming shortly.

Update: As expected, the #s were woeful, now all I need for soothsayer status is for the SP500 to be green by day's end.

Market Manipulated! Levin Lets The Cat Out Of The Bag!

Original Content Sigma Options

++++++++++

Via ZeroHedge, here is a jawdropping video where Larry Levin let's the cat out of the bag about gu'mint manipulation.

"Larry Levin is a professional futures trader. He has been in and around the S&P 500 futures pit at the largest futures exchange in the world; the Chicago Mercantile Exchange (CME), for almost 20 years.

Larry has been trading his own account or company's proprietary accounts since 1993, trading an average of 2500-3000 E-mini S&P futures contracts a day."

The meaty bit starts at about 2 minutes in.

BUMP - Lessons in Economics

I just wanted to highlight these videos on economic by Prof. Krassimir Petrov that I posted back in September. Now is a good time to review them.

Business Cycles, Part 1 of 4 - Introduction, Prof. Krassimir Petrov

Business Cycles, Part 2 of 4 - Business Cycle Indicators, Prof. Krassimir Petrov

Business Cycles, Part 3 of 4 - The Austrian Boom, Prof. Krassimir Petrov

BusinessCycles, Part 4 of 4 - The Austrian Bust, Prof. Krassimir Petrov

Each is over an hour and essential viewing for anyone interested in economic cycles.

Goldman Sachs Tiptoeing Into The Bear Camp

Blokes like Mike Panzer, Peter Schiff & Stephen Roach have been bears for a long time and while it's nice to have such credible allies for the bear case, at times I wonder if we're all a bunch of fucking "glass half full" nutters and the economy will expand ad infinitum, like the mocking, smirking, asshole perma-bulls seem to think.

But when the likes of Goldman Sachs jumps the fence, it means there must be some substance to the bear view... and it must be close.

No need for further comment from me on this article which appeared in The Telegraph:

By Ambrose Evans-Pritchard
Last Updated: 5:43pm BST 27/09/2007

Goldman Sachs has abandoned its ultra-bullish view of the world economy, warning of a likely recession in Japan and mounting risks that US property slump could spread to parts of Europe.

In a new report, "The Global Economy Hits a Crunch", the US investment bank said it was no longer sure that Asia and Europe would be able to pick up the growth baton as America stumbled. It fears that turmoil is spreading beyond the debt markets to the factory floor.

"Much has changed since mid-July, when we wrote that 'the global economy continues to enjoy one of the strongest sustained expansion in modern history'. The mood in financial markets is clearly darker, and the economic data in the developed world is showing signs of wear," it said.
advertisement
<A HREF="http://ads.telegraph.co.uk/event.ng/Type%3dclick%26FlightID%3d22539%26AdID%3d27295%26TargetID%3d5730%26Redirect%3dhttp://www.telegraph.co.uk/portal/main.jhtml?view=CAMPAIGN&grid=A1NoGoogle&pg=/ETHtml/content/promotions/2007/09/06/horrible/index.jhtml&pc=Telegraph%20horrible%20library" target="_top"><IMG SRC="http://adc.telegraph.co.uk/h/house/horrible/HScience_300x250.gif" WIDTH=300 HEIGHT=250 BORDER=0></A>

"Japan's recovery is tottering, with the chance of an outright recession having risen to nearly two in three," said the report, authored by chief economist Jim O'Neill.

It is an abrupt change of tack for the bank known as the "cheer leader" of the global boom. Until now Goldman has insisted that Asia and the developing world are strong enough to shrug off an American slowdown, allowing world growth to keep racing ahead without missing a step -- despite subprime woes.

Often overlooked, Japan remains the world's second biggest economy and top creditor with some $3,000bn in net foreign assets.

Output had already contracted an annual rate of 1.2pc in the second quarter before the credit crisis hit.

There has since been a surge in the yen as speculators unwind carry trade positions, leaving Japan's margin-trading housewives and grannies nursing big losses.

Wages have fallen for the last eight months in a row. They are now down 1.9pc from a year ago, threatening to pull the country back into deflation.

Goldman Sachs feared it was now "inevitable" that consumers would batten down the hatches for a while.

The bank said Europe is now so weak after a clutch of dire confidence surveys in Germany, Italy, France, and The Netherlands that any further rate rises by the European Central Bank are "off the table".

It expects the euro to fall back to $1.35 against the dollar over the next year, and sterling to tumble to $1.88 as the Bank of England pushes through three rate cuts.

The one bright spot is the 'BRIC' quartet of Brazil, Russia, India, and China, all still firing on four cylinders, if slowing slightly.

In a separate report, "Rising Risks to the Global Housing Market," it said that much of global system had succumbed to a property boom that is in some ways more stretched than in the US, with real (inflation-adjusted) house price rises of over 100pc in France, 60pc in Italy, 55pc in Canada, and 72pc in Australia since the late 1990s. The bubbles in Spain and and Ireland have been more extreme.

"Such a widespread housing boom has little precedent in modern history. In those markets where prices have run up the most, and rental yields have fallen dramatically, the risks of a housing correction are likely to have increased materially," said the note, by Peter Berezin.

"The wealth effect for housing is about twice as large as for equities, with consumption falling by about two cents in the short run for every $1 decline in home prices," he said.

He expects US house prices to drop 7pc in 2007 and another 7pc in 2008, as mortgage lenders shut off credit to chunks of the market. "The US is often a leading indicator for what happens in the rest of the world".

Mr Berezin said construction booms usually lead to housing busts lasting several years. Residential construction in the US reached 6.3pc of GDP at the peak of the bubble, the highest since the baby boom in the early 1950s.

In Spain, it has been even higher, averaging 8.7pc of GDP since 2003, and in Ireland it has exploded to 14.2pc, leaving a overhang of unsold property. House prices are already falling in Spain, where 98pc of mortgages are on floating rates that have roughly doubled since late 2005.

Property prices have dropped for the last four months in a row in Ireland.

Mr Berezin said the Goldman's "decoupling" thesis was based on the assumption that the US housing slump was a "country-specific-shock" that would not spill over into other economies. This was now in doubt.

"The spread of global credit risks has introduced a new potential transmission mechanism. If home prices in the key economies begin to fall, this will have an adverse effect on global growth," he said.

Bears on Message

I've been totally slack about blogging the last few days. Partly because not much is happening from my economic perspective (in terms of things to write about) and partly because I am feeling a bit deflated/disappointed at the recent Fed actions. I really feel it is the worst thing they could have done for the health of the world economy in the medium term.

Anyway, while I recover some enthusiasm for writing shit on the internet, have a look at this video. It is Glen Beck interviewing couple of my favourite bears, Peter Schiff and Michael Panzer (who's blog, Financial Armageddon appears in my blogroll)

Rate Cut Post Mortem

As you know I have my own feelings about Helicopter Bens's rate cut. In case you haven't been following along, I think it was an extraordinarily bad decision and each member of the FOMC should be strung up by their balls. I've been dieing to comment from a bush economists point of view (and have been ranting and raving offline), but really wanted a more professional opinion for this blog.

As usual, Mick Shedlock delivers the goods with some excellent analysis in Bernanke's Bullet Misses The Mark. Here is a synopsis taken directly from the article:

List of What's Changed

• Perception has changed.
  
• Any perception of the Fed as being concerned about inflation went out the window.
• Any perception of the Fed as being concerned about the dollar went out the window.
• Bulls are happiest they have been in months.
• The stock market is higher.
• Gold is higher.
• Oil is higher.
• The Prime Rate dropped 50 basis points.

List of What Hasn't Changed

• Mortgage Rates. (Actually mortgage rates rose since last week as the chart below shows).
• Auto Loan Rates. Nearly identical to last week.
• Home Equity Loan Rates. Nearly identical to last week.
  
• The outlook for jobs. (If anything the outlook is weaker judging from the Fed's panic).
• Credit Card Interest Rates.
• The foreclosures outlook did not change. It is still bleak.

The Fundamentals Have Not Changed

• Massive numbers of foreclosures are still going to happen.
• Banks are going to be stuck in huge numbers of REOs.
• Home inventories are still rising.
• The economic ship is still sinking
  
• The jobs market remains grim

Please read the whole article as it makes a whole bunch of sense.

As expected & noted, there has been movement in the markets; The USD is taking it up the ass, and Metals, Oil and other exchange rate sensitive markets are flying. The really curious movement to me was in the long bonds, both in the US and Europe. Since the rate decision, the contracts I follow closely and trade, The Euro Bund and The 10 Year T-Note have been down strongly and in fact accelerating today in big one day moves.

If you don't happen to know what this means, it means that longer term bond yields, which mortgages and other long-term are priced off, ARE RISING, as indicated in the 10 year YIELD chart on the left.

I am on record as holding the view that rates should in fact be rising and I think that once liquidity is normalized somewhat, Bernanke will be forced to raise again. But on the long end of the yield curve at least, the market is doing what the Fed doesn't have the balls to do. Those who have painted themselves into a corner in the housing market won't be getting any relief and nor should they. (Though I do feel sympathy for how the market and mass psychology have compelled them to make unwise decisions. The psychology used by vested interests is very strong.)

In conclusion, the shipwreck is still on course, a .5% cut proves it. The only area where I remain bemused is why equity traders are bullish.

10 Priciples of Economics

"Mankiw's 10 principles of economics, translated for the uninitiated", by Yoram Bauman

This is a really good watch. :-) From Calculated Risk.

Goodbye USD!

0.5% is a very fucking lousy decision.

I'll let the real economists mull over than one, while ignoring the capitol hill sycophants.

At Last! A Voice of Reason.

Sort of. Katherine Mann says hold interest rates... but doesn't think a recession is on the cards. Hmmmmmm.....

The UK Mortgage Lender Implode-O-Meter?

By now just about everyone will know about the Northern cRock bank run on Friday and Saturday. I haven't posted till now for fear of merely regurgitating what is already posted in depth all over the freaking internet.

I have been amusing myself with pictures of queues outside branches like the one on the right... well, OK it's a photoshop job just for fun.

The only problem is that there are a lot of folks who won't be thinking the whole situation is funny at all. There will be hundreds of Northern Rock customers who will be having sleepless nights over the weekend, worried about the security of their investments; like the poor old lady below who stood in the queue for hours to get her money out, only to be turned away at closing time by the local constabulary. I feel for them.

Internet customers are having a hell of a time logging on and accessing their accounts amid suspicions that bandwidth has been deliberately restricted to stem the hemorrhaging of funds from the bank.

Of course everybody from the NR CEO, to the press, to the Chancellor of the Exchequer is saying that the bank is sound and that people funds are safe. But these parties are not known for telling the truth are they? Depositors obviously feel discretion is the better part of valour and taking their funds elsewhere. I can't say I blame them one iota.

Unquestionably, there is no way that NR can continue in it's current form, so basically the first mortgage lender in the UK will very shortly cease to exist.

That makes me wonder if some enterprising Englishman/woman has kicked off a UK version of
The Mortgage Lender Implode-O-Meter, because it might just be the first of many. Sub-prime lending in the UK has been rife and has been hidden by strong price appreciation to date and folks have been able to sell or MEW themselves out of trouble. But with the first month on month falls recorded, those days are over.

Regarding the future of the UK property market, I think there is a sound opinion here in the following video:



No matter what exactly transpires next, (I suspect governments and CBs will desperately try to prop up the boom) The world changed in August and things will be different and harder from now on.

The Myth Of The Perpetual Boom

In "The Age" today there was an article detailing how loan defaults have risen 30% in Australia over the last financial year. Read It.

That's not really what I wanted to concentrate on. There are literally hundreds of articles bringing to attention the signs of a world economy going over the falls. No need to regurgitate too much of that here.

The bit that caught my attention was this statement:

...And economists say consumers who haven't experienced a recession are upping their borrowing to levels more than double their income because they are confident the good economic times will continue.

This is something we bush economists of an Austrian bent have been commenting on for some time now. There are many folk that have either never experienced a recession, or who have forgotten that they can occur.

Only recently I was speaking to quite a successful small businessman who refused to concede even the remotest possibility of a recession... not just in the immediate future, but ever! LOL! Anyway, I changed the subject pretty smartly to conserve a friendship.

I notice even experienced economists who speak on Bubblevision seem to imply that recessions are just not on the cards anymore.

WTF?

I think the contrarian indicator is invokes waaaaaayyyyyy too early these days, (It's fashionable to go against the tide ). I often think it's a good idea to fade these "early" contrarians, but in these days where everybody knows about the contrarian indicator, and hence its inappropriate use, surely there must come a time to fade the faders who are fading the faders. lol.

In other words, in the quote above, is there a "genuine" contrarian signal? There sure are lots of bears about at the minute, but the great unwashed masses are still unrelentingly bullish.

Riches to Rags In The City

In the last few posts I've been speaking about the now well known problems in the credit markets, and how this is starting to affect London property prices. Of course yje property perma-bulls refuse to concede that falls in prices are possible; real estate only ever goes up don't you know?

History and a few deft keystrokes in Excel disprove that, but for falls to become a reality, there must be vectors that exert downward forces. I've mentioned the vanishing bonuses, but how about unemployment? I'm not talking about factory workers and builders any more, I'm talking about suits.

Check out this blog from the BBC's Robert Peston LINK:

Scything the City

• Robert Peston
• 13 Sep 07, 07:45 AM

The humungous bonuses trousered by many investment bankers may seem a trifle de trop.

But it’s not a stress-free existence. They live in an eat-or-be-eaten world and are in work for as long as they are economically productive - and barely a second longer.

So brutal redundancies are now only days and weeks away, as it becomes commonly accepted that the turmoil in financial markets will depress certain lines of business for months if not years.

The boss of one investment bank tells me he expects a first wave of job cuts that will see individual banks reduce their headcounts between 5 and 15 per cent.

And he says he wouldn't be surprised if that was followed just a few months later by a second wave of similar or even greater magnitude.

First out the door will be many of the creators of the current crisis: the manufacturers and traders of assorted asset-backed securities that you can hardly give away right now; all those debt whiz-kids who engineered the poisonous collateralised debt and loan obligations; the banking servants of a hedge-fund world that’s shrinking fast and of a private-equity industry in cryogenic storage.

Should we weep for their plight? Some of you will scoff at the thought. It’s a big hello to schadenfreude.

Actually, there could be one or two benign consequences from the slaughter of the not-so-innocent, such as a deceleration in the rampant inflation of central London property (okay, I know this is not a universal good).

But don't think we'll get away scot-free.

The economy called Britain is built on financial services (though more by accident than design). Something over a third of our overall economic growth has been generated in recent times by the City and financial services.

Lean times in the City means slower growth, less wealth to spread around and a substantial dip in the Treasury's tithe.

When the bubble is pricked, no umbrella is big enough – we all become a bit damp.

There are still corpses to float to the surface in this whole credit crunched scenario IMO. Bearing in mind the gravity of what happened in July-August, things are just a bit too quiet to be real.

Sub-Prime Mess Contained

A leading economist said today that there is no evidence that the sub-prime contagion will spread beyond the stratosphere. Meanwhile, the credit crunch is starting to involve the cheap tat buying public.

Families have been warned of a looming credit drought as banks and building societies stop handing out cards and overdrafts to hard-pressed households

Industry experts have said that lenders are clamping down on debt applications for fear that borrowers default as the economy worsens.

It is the latest evidence of how the financial markets crisis is affecting households and follows news that mortgage companies are primed to increase their interest rates, causing more hardship for hundreds of thousands of households due to renew their home loans in the coming months.

Equifax, a company that provides credit checks, said households would find it increasingly difficult to borrow money in the coming months, as lenders started to refuse more and more applications. FULL STORY

I think this will have a quantum effect on retail sales... perhaps even accelerate mortgage defaults. I know plenty of folks who are doing the credit card boogie to make their over-committed ends meet, all the while building more and more debt. Another signal we bush economists take note of.

Jobs

So Wall Street economists were expecting ~+115,000 on the NFP number.

Really?

The building industry is hemorrhaging jobs from the great gaping hole in its aorta and I suspect there would be a few real estate broker sending CVs around at the moment too; and the NFP was a shock?

"It's a major shock to the market," said Peter Cardillo, chief market strategist at Avalon Partners. "If the job market continues to weaken, fears of a recession will continue to accelerate, calling into question corporate earnings."

You have to wonder about economists. I mean I have an interest in economics and though no formal degree, I would consider myself what would be termed here in Australia as a "bush economist". This is someone who basically has been fucked by not knowing about business cycles before and has learned to "sniff out" when things are starting to get out of whack.

We bush economists have been worried about sub-prime, stretched asset values and rampant malinvestment for a couple of years now while the smirking Wall Street assholes have been bullshitting on about Goldilocks economies.

We have also been wondering how long birth and death models and other such nonsense could disguise the real state of employment. When you get an actual drop of 4,000, it's time for folks to pull out their CVs and polish them up for a potential mass mail out.

But look and the bright side, it's another factor for Uncle Ben to justify a rate cut.

The logic goes: slowing economy => rate cut => bullish => market rally

Yep, Goldilocks rules... along with other fairytales

Leads From Japan

Japan is the worlds second largest economy on earth by far and now looks to be leading the world in the race to recession, as reported in The Telegraph.

As the latest weak data hits, optimists are now few and far between, writes Ambrose Evans-Pritchard

Japan's economy has slowed sharply over the summer and may now be on the brink of recession, dampening hopes that Asia will buttress world growth as America battles the sub-prime housing crisis.

In the latest grim data, Tokyo said wages had fallen for the past eight months in a row. The cumulative fall over the past year to July has been 1.9pc, evidence of how intractable deflation can become once lodged in an economy. Business investment fell 4.9pc, with the pace of decline gathering speed in recent months.

The seemingly endless string of weak data from Japan comes amid mounting concern in Washington that the US economy is starting to buckle, and possibly tipping into a severe slump.

And a couple of other snippets:

*According to Bloomberg reports, the mood at the gathering turned ever blacker as speaker after speaker warned that the economy may be on the cusp of a sudden downward dive.

*While Fed chairman Ben Bernanke said the bank would "act as needed", he cautioned the market not to expect an instant bail-out. "It is not the responsibility of the Federal Reserve to protect lenders and investors from the consequences of their financial decisions."

*Japanese investors have taken a beating on the yen "carry trade", where they borrow in Tokyo to chase higher yields around the world. The Bank for International Settlements said in its quarterly report yesterday that the overall yen carry trade has reached $1,050bn and the Swiss franc sister trade is $678bn.

Lots more in the full article.

The last point brings me to the inevitable chart. The Yen has been a useful leading/confirming indicator for movements in the US stock market. The chart below shows the recent action of The JPY/USD futures in candles with the S&P500 in bars and show the clear inverse correlation between the two.

This begs the question: Does the unwinding of the carry trade have implications for the fortunes of the US stock market, because the is cause the liquidation of stock positions? Or is it the other way 'round: Does the liquidation of stock position cause the repatriation of Yen, resulting in the unwind?

I don't know and would be interested in the answer if anyone has data on this.

In any case, the technical picture in the Yen looks bullish above the trendline. My best technicians guess is that it remains support. (50/50 proposition of course) That would not be good for the indexes.

In any case, Uncle Ben seems reticent about bailing institutions out of malinvested trouble. Could this mean he will hold rates in September? That could well spark off another savage sell-off.

According to Austrian economic theory (as per the videos I posted a couple of days ago), that would be the best course of action, just let it tank, have a speedy liquidation of malinvestment, let the flaky institutions/businesses go to the wall and get on with life after that. I've always thought that too.

Then we could all have the prospect of a "healthy" growing economy again. It is just a shame political imperitives and demands for institutional welfare intervene.

September Divinations

Always a useless exercise, predicting the future. However armed with a few statistics, I guess we can make a better "guess".

Anyone who has read CNBC over the weekend will have had the "heads up" that September is statistically the worst month of the year, set out in table form from their site:

Most have October locked in as the scariest month because of the few crashes that have occuredin October, but in actual fact, in most years October is up. Apart from those crashes, it's usually a good month. It's September that has quietly put in the hard yards as the crappiest month of the year.

For those who like a more graphical format, here is a bar chart I found at The Ducster's site:

Add to these statistical probabilities, the problems in the credit markets... yeah, yeah I know it's gone quiet on that front. It's very quiet, almost too quiet. I don't believe the problems have gone away or have been resolved, just a dearth of news on the subject; we don't really know what's going on deep in the bowels of financial institutions. According to my few little contacts in the institutions, they themselves don't know the extent of the problem, so everybody is keeping mum.

If the news breaks the surface the surface again, it could be truly fugly.

On the other hand, there is the possibility of the morally hazardous rate cut. In this interest rate obsessed stock market where rates are seemingly the only important fundamental, that could send the the permabulls into a muck lather buying frenzy.

I guess it all boils down to what corpses float to the surface in the next two or three weeks, but I'd be less surprised by new lows than new highs... not that I'd be surprised by new highs. There are still plenty willing to ignore the fact that we are likely to be moving into a credit crunched period of the cycle.

Austrian bust anyone?

Lessons in Economics

Here is an excellent series of lectures on the Economic cycle from the Austrian perspective. (My favoured model)

Business Cycles, Part 1 of 4 - Introduction, Prof. Krassimir Petrov

Business Cycles, Part 2 of 4 - Business Cycle Indicators, Prof. Krassimir Petrov

Business Cycles, Part 3 of 4 - The Austrian Boom, Prof. Krassimir Petrov

BusinessCycles, Part 4 of 4 - The Austrian Bust, Prof. Krassimir Petrov

Each is over an hour and essential viewing for anyone interested in economic cycles.

Photo - Ludwig Von Mises

Cynical Responses to Bush's Initiative

Ah yes, the President himself rides in on his white stallion to save the poor sub-prime defaulters. And my, what cynical responses from pragmatic bloggers:

*Ritholtz says Politics as Usual

* Mish parses the real thought process behind the initiative

*The Fundamental Analysist is wondering why Bush is asking Paulson to look into the sub-prime mess when Paulson doesn't even think there is a problem.

* The irony is not lost on Financial Armageddon either.

Normally accusations of cynicism have a pejorative connotation associated with them, however in this case, the cynicism is entirely justified. Antisthenes, the founder of cynicism, would be well proud.

On the other hand, the goofy permabulls have an entirely different view.

*The Fly says Fuck you, we're going higher.

In the short term, they are probably right.